Predictions for China in 2014

By Roy Maurer
1/15/2014

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The year ahead could see companies in China feeling the disruptive impact of technology, chief information officers becoming a hot commodity, the government focusing on job creation over growth, and shoddy infrastructure reaching its end life, according to Gordon Orr, director and chairman of McKinsey Asia, based in Shanghai.

In a recent podcast, Orr laid out two macro themes that will shape China in 2014: productivity growth and technology-based disruption.

He explained that China’s input costs continue to grow while intense competition and overcapacity dissuade businesses from passing price increases on to customers. “Labor costs continue to rise by more than 10 percent a year, land costs are pricing offices out of city centers, the cost of energy and water is growing so much that they may be rationed in some geographies, and the cost of capital is higher, especially for state-owned enterprises.”

Orr sees higher productivity as the solution. This productivity focus will extend beyond manufacturing, he said, and include agriculture and services.

“And in industry after industry, companies will feel the disruptive impact of technology, which will help them generate more from less and potentially spawn entirely new business models.” Orr pointed out that more and more consumers want to buy commodities and receive comprehensive services online. With technology making that possible, businesses will have to reinvent the way they interact with customers. “Will Chinese consumers be willing to bank online?” he asked. “Absolutely—if their willingness to shop online is any guide.”

The Emergence of CIOs

The scarcity value of the chief information officer (CIO) is going to skyrocket, Orr predicted. Describing China as a “laggard in applying business technology in an effective way,” he cited a McKinsey survey that showed that Chinese companies widely regard the IT function as effective in helping run the business but not in helping it to expand. Simply trying to find the CIO in many state-owned enterprises is like searching for the proverbial needle in a haystack, he quipped.

In many enterprises the productivity imperative will make technology a top team priority for the first time, he said. “Everything is on the table: digitizing existing processes and eliminating labor, reaching consumers directly through the Internet, transforming the supply chain, and reinventing the business model.”

Orr forecast large compensation packages and a talent war over strong CIOs.

Growing Jobs

The Chinese government will shift gears from economic growth to job creation, he predicted, as the country needs millions more jobs. Many manufacturers, both multinational and Chinese, are producing more with less. For example, Foxconn announced in 2013 that it wouldn’t hire any entry-level workers, instead relying on automation and employee retention.

“So as technology enables massive disruptions in service industries and sales forces, what happens to millions of retail jobs when sales move online?” Rising numbers of university graduates will have fewer and fewer jobs that meet their expectations, he said, adding that this will create unhappiness and put pressure on state-owned enterprises to improve their performance, to use capital more efficiently, and to hire and retain staff.

Infrastructure Tipping Point

Orr observed that much of the residential and office construction in China over the past 30 years used low-quality methods and materials that are aging badly. Now, buildings barely 20 years old are visibly decaying. “Many will need to be renovated thoroughly, others to be knocked down and rebuilt. Who will pay for this wave of reconstruction?”

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